New Home-equity Loan Is The Old 2nd Mortgage In A New Package

September 26, 1986|By Dick Marlowe of The Sentinel Staff

For the majority of Americans, the place where they have the most equity is easy to identify - it is their home.

Like small change in the possession of children, that equity seems to be burning holes in the pockets of more and more U.S. homeowners. And bankers have not allowed to go unnoticed the fact that there is more than $2 trillion out there on Main Street U.S.A. in the form of equity in homes.

Consequently, the home-equity loan is becoming a hot item. While the phrase ''home-equity loan'' has a good ring to it, there isn't anything new about the idea. It is really the old second mortgage, packaged neatly, wrapped in eye-catching paper and marketed with the best skills of Madison Avenue.

What seems ironic about the newfound popularity of the home-equity loan is that it comes at a time when both the nation and its citizens are in more debt than at any time in history and at a time when the number of personal bankruptcies is soaring. At the same time, of course, there are growing fears of a lenghty recession - or slow economic growth at best. The rising popularity of home-equity loans also comes at a time when millions of Americans have reached their borrowing limits on credit cards.

Back in less-uncertain times, a step as drastic as taking out a second mortgage involved a great deal of cogitation and soul searching to determine whether the need for money was worth the risk of losing a home. Many late- night discussions have been held around the kitchen table over whether a child's education was worth the risk of the dreaded second mortgage.

David Klock, chairman of the finance department at the University of Central Florida, feels that a child's education might be a very good reason for taking out a home-equity loan. He also feels that there are a few other equally good reasons for putting your home on the line.

The economic principle that should be applied, Klock said, is as old as the hills. ''You don't use long-term financing to purchase short-term depreciating assets.'' Translated into street talk, that means you shouldn't risk your house to pay for a car, a boat - or a cruise to Tahiti.

As a professor of personal finance, Klock sees nothing bad about the concept of home-equity loans. ''If people get into trouble because of credit,'' he said, ''you can't blame the bank because those people don't exercise financial prudence.'' But he wonders whether people using home-equity loans are aware of all the rules. ''I don't know,'' Klock said, ''if all these people realize they are collateralizing their homes. That's a big risk.'' It can become an even bigger risk in troubled economic times when jobs are in jeopardy.

Klock, who also works with troubled young married couples through a church group, said, ''The excessive use of credit is one of the major causes of marital problems between young people. They run up credit and just don't know how to handle it.''

While home-equity loans are ''perfectly legitimate and a very desirable product under the right circumstances,'' Klock said, he warns that the use of credit ''just because it is there'' is not a wise or prudent financial move. Make sure, Klock advises, that what you are borrowing for is worth the risk. ''If you use up the equity in your house for buying boats or cars,'' he said, ''it is not going to be there when junior reaches college.''

Klock, 42, describes himself as an ''old conservative Yankee'' who sees nothing wrong with leaving the equity in the house rather than using it to buy frivolities. Besides, he said, ''The idea of having a house paid off at retirement is not all bad.''

Remember, too, that the money easiest to come by is usually the easiest to spend.